The Supreme Court's GAAR Decisions: Change or Chimera?
| Author | Livia Singer and Marilyn Vardy |
| Pages | 107-138 |
107
[four ]
The Supreme Court’s GAAR Decisions:
Change or Chimera?
livia singer and marilyn vardy*
e decisions of the Supreme Cour t of Canada in the Canada Trustco and
Mathew cases, released October , have been heralded by some as
having a very signi ficant impact. In one of the firs t published case com-
ments following the releas e of the Supreme Court GAAR decisions , the Su-
preme Court’s GAAR ca ses were introduced with considerable fanfa re: “[I]t
is not an exaggeration to state that the i ncome tax community viewed thes e
decisions as the most sig nificant tax de cisions in the last se veral years, if
not decades.”
After a lengthy wa it for the interpretation of the GAAR by the Supreme
Court, the ta x community welcomed the Canada Trustco and Mathew de-
cisions with enthusia sm, hoping to satisfy the hunger for enl ightenment.
However, it remains to be seen to what extent the Supreme Court’s initia l
GAAR decisions w ill, in fact, change the course of t he development of tax
avoidance jurisprudence.
* Tax Law Services Se ction of the Ontario Region al Office of the Canada Depa rtment of
Justice. e views e xpressed in this chapt er are those of the authors and a re not to be
attributed to t he Department of Justice or t he Canada Revenue Agency.
Joseph Frankovic, “e Supre me Court on GAAR: e Line i s Far from Bright (No Kid-
ding),” Tax Topics, No. (Toronto: CCH Canadian Ltd., November ) –.
108 LiviaSingerandMarilynVarley
A. CANADA TRUSTCO v. THE QUEEN
Canada Trustco Mortgage Company purchased trailers, which it circu-
itously leased back to the vendor to offset revenue from its lea sed assets
by claiming a substa ntial capital cost al lowance (CCA). Canada Trustco
was thus able to defer paying ta xes on the amount of profits reduced by the
CCA deductions, which would be subjec t to recapture upon disposition of
the trailers. e Tax Cour t, the Federal Court of Appeal, and the Supreme
Court all concluded t hat the GAAR did not apply to deny the ta x benefit.
e Supreme Court issued judgment di smissing the Crown’s appeal in e
Queen v. Canada Trustco Mortgage Company.
Unquestionably, the Supreme Court adopted a new approach to the
GAAR in Canada Trustco. e Court summari zed the seven key elements
of its approach as follows:
. ree requirement s must be established to p ermit application of the GAA R:
() A tax benefit result ing from a tran saction or part of a se ries of
transact ions (s. () and ());
() at the transact ion is an avoidance transaction in t he sense that it
cannot be said to have been reasonably undertaken or arranged pri-
marily for a bona fide pur pose other than to obtai n a tax benefit; and
() at there was abusive tax avoida nce in the sense that it cannot be
reasonably concluded that a t ax benefit would be consi stent with
the object, spirit or pu rpose of the provision s relied upon by the
taxpayer.
. e burden is on the tax payer to refute () and (), and on the Minister
to establish ().
. If the exi stence of abusive tax avoida nce is unclear, the benefit of the
doubt goes to the taxpayer.
. e courts proceed by conducting a unifie d textual, contextual a nd
purposive ana lysis of the provision s giving ris e to the tax benefit in
order to determine why the y were put in place and why the benefit was
conferred. e goal is to arrive at a purposive interpretation that is har-
monious with the prov isions of the Act that confer the t ax benefit, read
in the context of the whole Act .
. Whet her the transact ions were motivated by any economic, com mercial,
family or other non-t ax purpose may form pa rt of the factu al context
Canada Trustco v. e Queen, SCC [Canada Trustco].
The Supreme Cour t’s GAAR Decisio ns 109
that the courts m ay consider in the anal ysis of abusive tax avoida nce
allegations under s . (). However, any finding in t his respect would
form only one part of t he underlying facts of a ca se, and would be insuffi-
cient by itself to esta blish abusive tax avoidance. e centra l issue is the
proper interpretation of t he relevant provisions in light of t heir context
and purpose.
. Abusive tax avoidance may be fou nd where the relationships and trans-
actions as expressed in the relevant documentation lack a proper basis
relative to the object, spi rit or purpose of the prov isions that are pur-
ported to confer the t ax benefit, or where they are whol ly dissimil ar to the
relationships or tra nsactions that are contemplated by t he provisions.
. Where the Tax Cour t judge has proceeded on a proper cons truction
of the provisions of the In come Tax Act and on finding s supported by
the evidence, appell ate tribunals should not int erfere, absent a palpable
and overriding error.
e decision in Canada Trustco, as is the case of most decisions that t urn
on particul ar facts, leaves a number of un answered questions, pr imarily in
respect to how the approach wil l be applied in different fact scenarios.
e Supreme Court rendered its decision on the ba sis of the GAAR as it
read prior to the most recent amendment, and d id not apply the amended
version of section on the facts of t his case. e cour t said that the
amendment, even if applied, would not wa rrant a different approach to
the issues on appeal. However, in a subsequent case, when faced with the
amended wording, it is sti ll open to the court to modify it s approach.
e meaning of the expres sion “series of transact ions” under subsec-
tions () and () is not clear. Subsection () extends the meaning to
include “related transactions or events completed in contemplation of the
series.” e Supreme Court in Canada Trustco clarified that “in contempla-
tion” is to be read not in the sense of act ual knowledge but in the broader
sense of “becaus e of” or “in relation to” the series. us, the ph rase can be
applied to events either before or after t he basic avoidance transactions.
According to subsection (), the GAAR does not apply to a trans-
action that “may reasonably be considered to have been undertaken or
arranged prima rily for bona fide purposes ot her than to obtain t he tax
benefit.” Where there are both ta x and non-tax purposes to a t ransaction,
Ibid. at para. .
Ibid. at para. .
Ibid. at para. .
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